For Europe’s economy, US election risks outweigh upside

For Europe’s economy, the November 5 US election offers a "least bad” outcome of a challenging Kamala Harris presidency or a second encounter with Donald Trump which threatens to be yet more bruising than the first.On two key areas - trade policy and the sharing of rising security costs among Nato allies - Europe expects few favours from a Harris presidency which it sees as "Biden continuity”.Trump 2.0, on the other hand, presents multiple dangers: if he were to pull US support for Ukraine, European governments would need to ramp up defence spending fast; and if he triggered a global trade war, Europe fears it would be the big loser.Anti-China measures are a rare area of bipartisan agreement in the US election campaign. For Europe’s export-driven economy, that raises the question as to whether it can continue to juggle trade ties with both the US and China.Whoever the winner of the US election is, it is unclear whether Europe can continue to benefit from US growth without reducing trade with China itself.Both US candidates have the same direction of travel - Trump less predictable and perhaps willing to be more confrontational with the European Union.Half of Europe’s output comes from trade, double the rate in the US, while the region’s 30mn manufacturing jobs - compared to only 13mn in the US - mean it is highly vulnerable to anything that restricts commerce.Support for free trade in Washington has evaporated in the past decade. Joe Biden chose not to scrap outright tariffs levied in Trump’s first presidency and has added his own focus on US jobs with the Inflation Reduction Act (IRA) subsidies.While Harris is seen pursuing a path similar to Biden, Trump has threatened to go further with across-the-board tariffs of 10-20% on all imports - including those of Europe, with whom America still has annual trade worth over 1tn euros.Spanish olive producers have seen their exports to US, once their main foreign market, slump by 70% after Trump in 2018 imposed tariffs which remain in place despite World Trade Organisation (WTO) rulings against them.For those European companies with US presences, the added uncertainty is whether Trump will follow through on promises to scrap Biden’s IRA green energy subsidies.German machinery firm Trumpf, which employs 2,000 US staff and supplies equipment for electric vehicle batteries and solar, said it was not expanding those activities in the US due to uncertainty about the election outcome.The US election could also have major implications for the defence budgets of European governments struggling with debt levels inflated by post-pandemic recovery spending.Again, the question is more one of timing than destination: Harris is expected to pursue US pressure on Europe to pick up more of the tab for regional security while the lack of clarity around Trump’s commitment to Ukraine hugely ups the ante.While a Harris presidency could have little measurable impact on Europe’s economy, the downside risks of a second Trump term in office are clearly tangible.Goldman Sachs economists estimate that if Trump went ahead with his tariffs, their direct effect plus the trade uncertainty they would generate could shave one percentage point off output in the 20 countries of the euro area - more than the weak 0.8% growth they are forecast to eke out this year.Any economic growth benefits to be had if an ebbing US commitment to Ukraine forced Europe to boost defence spending would be cancelled out by the hit the regional economy would take from the resulting geopolitical risk.The European Commission has a closed-door team of officials to study how the EU will be affected by the election outcome. But any policy conclusions they draw will need to secure an EU consensus - which, as shown by the bloc’s divisions over how to deal with Chinese electric vehicle imports, can be elusive.Pro-European optimists suggest the US election - especially in the event of a Trump victory - could have a salutary shock effect of finally spurring the region to adopt the type of deep reforms proposed by former ECB chief Mario Draghi last month.